What is Crypto Mining and How Does It Work?

Introduction

Crypto investors should know about the inner workings of a blockchain network in order to make better trading strategies. This article covers the technical process of mining and how it takes place.

What is Cryptocurrency Mining?

Mining is done to extract natural resources from the terrain such as gold, silver, and other precious metals. Blockchains allow developers to mint new tokens through a process that is also known as mining. Blockchains are decentralized ledgers that record all the verified transactions on a series of blocks.

The verification process happens in the form a consensus model. For example, Bitcoin uses PoW or Proof-of-Work mechanism. Miners are node operators who fulfill the requirements of a given consensus mechanism to verify all transactions on a block.

In return blockchain releases rewards in the form of virtual currencies for miners. This process is called minting new tokens through mining.

How does Crypto Mining Work?

As mentioned earlier, blockchains are decentralized networks. In order to make a blockchain secure and its transaction record authentic, a blockchain has a consensus mechanism. There are many different types of consensus mechanisms based on the underlying code of a given blockchain.

Miners are nodes on a blockchain that complete the consensus mechanism process in order to verify real transactions on the network.

All transactions on a blockchain are sent to the memory pool. Blockchain rewards miners by minting new tokens as rewards for verifying transactions on a given blockchain. To ensure this, miners solve the cryptographic code to ascertain the correct transaction records and prevent duplication or falsified records. Here are four main steps involved in the mining process:

Hashing

Hash functions transfer pending transaction from the memory pool in a successive order. For each data unit passing through the hash function, a fixed size output that is called hash.

Hashes are string of numbers and letters that work as a unique identifier and represent all the information present in that transaction. Miner hash and list each transaction using hash and add a custom transaction that is used to carry their block rewards.

Merkle Tree

Merkle Tree or hash tree is the organized form of all transactions. Merkle tree further organize hashes into pairs and hashing them again.  The new hashes are paired again and hashed again until all are consolidated into a single hash.

The final hash is called the root hash and this hash contains all the data and information from its paired hashes.

Block Header

Block header is an identifier for every block. It means that each block has a unique hash. Miners combine the hashes from previous blocks with the root hash of the current block to create a new block hash.

During this process, they also have to add arbitrary numbers that are known as nonce. The process of combining all three elements continue until a valid hash is created.

Miners can only change the value of nonce since root hash and previous block hash remains constant. A valid hash must be less than a certain target value mentioned in the protocol. Additionally, block hashes start with a given amount of zeros that determines the mining difficulty.

Mined Block

Miners keep adding more computational power until they have found the correct hash block. The first miner to find the valid block hash can broadcast it to the network.

Nodes on the network will confirm if a newly broadcasted block is valid and add it to their copy of the ledger. In this manner, the broadcasted block becomes a confirmed block and miners get their rewards and start working on the next block.

What Happens If Two Blocks are Mined at the Same Time?

There are some instances where two miners broadcast valid blocks at the same time. In this situation, nodes are divided in two directions. However, nodes can wait until the next valid block is added and whichever block is mined on the top of the competing blocks is declared as winner. Miners who were working on the other block return to the chain that is mining the network.

Conclusion

There are many types of mining based on the type of consensus model a blockchain incorporates. At the same time, mining can also be classified in different sections on account of mining machines such as CPU, GPU, ASIC, and Mining pools etc.